Couriers and freight forwarders aren’t the only segments in the logistics and freight sector worth considering. There is also postal services; and the upcoming deregulation in both Europe and Japan provides both challenges and opportunities in this subsector.

Two major players in the postal services segment are Deutsche Post AG in Bonn and TNT NV in Amsterdam. Deutsche Post and TNT have national monopolies and hope to expand beyond their borders in the lucrative premium post segment, but also face the possibility of margin compression as prices fall with more competition. Global logistics firm Nippon Express Co. Ltd. in Tokyo and Osaka is expected to benefit through partnerships with Japan Post Service Co. as the latter is privatized.

However, none of this will happen fast. “Deregulation won’t happen overnight,” says Patricia Fee, money manager at I.G. International Management Ltd. in Dublin.

Deutsche Post and TNT also have global logistics businesses and Deutsche Post has a courier service under the DHL International GmbH brand. It also offers banking services through its postal outlets. Postbank, of which Deutsche Post owns 50% plus one of the shares, is one of the largest German retail banking networks with 10 million customers; it is also the market leader in direct banking.

Ordinary postal services and banking are not the volatile businesses that couriering and premium mail are; freight forwarding falls in the middle because the business is one of arranging transportation rather than providing it.

Here’s a look at these three companies in greater detail:

> Deutsche Post AG. The company, which operates under the trade name Deutsche Post World Net, is Europe’s largest postal operator and, according to the London office of UBS Ltd. , the most profitable — although it faces challenges as the German postal market is deregulated, beginning this year.

Deutsche Post’s DHL is also the world’s largest cross-border express operator — as a result of 8-billion euros worth of acquisitions since 2002 — and also the largest global contract logistics and freight-forwarding company following its purchase of Britain-based Exel PLC in 2005.

Charles Burbeck, head of global equities at HSBC Halbis Partners in London, likes Deutsche Post while J.P. Morgan Securities Inc. in New York sees the company as a “long-term value-oriented investor stock” and recommends overweighting it in the logistics and freight sector.

Burbeck admits that Deutsche Post is a controversial recommendation, but believes the company has a lot of potential. “It’s a cost-cutting story that will take time,” Burbeck says, but he believes it will be effective.

He considers the new management both good and credible and thinks the company could become the “European national champion” for premium post delivery. (There’s no point in focusing on ordinary post because margins are too thin, he says.)

Burbeck expects Deutsche Post to start with northern Europe and then expand throughout the continent by moving from major city to major city. This will be complimented by the company’s logistics business, which moves large items.

J.P. Morgan notes that there could be turbulence in the stock price in the short-term, but thinks the company has good long-term potential. It also notes that management has confirmed that Postbank “might come under review” and shares in it could be sold. Although the cash could be used for pre-funding pensions, management has said that “shareholders will be at the forefront of thinking.”

Given management’s emphasis on shareholder value, J.P. Morgan thinks a full break-up of the company down the road is possible if current plans don’t work out.

Fee is less enthusiastic, but she does see it as a trading opportunity over the next two years as restructuring produces 20% upside to some of its divisions in the next 18-24 months. But she says it isn’t clear what will drive growth because Deutsche Post hasn’t made the same investments in emerging markets as TNT has.

In addition, the company’s DHL courier service has not done well in the U.S., where it is very small and has never been profitable. There has been some improvement recently and the market expectation is that it will break even in two years. J.P. Morgan thinks that a solution to its U.S. challenge is likely to be cash consuming and may involve partners or more use of common assets by the company’s various divisions operating in the U.S.

@page_break@On the other hand, Fee notes that the integration of Exel has gone quite smoothly.

The company has completed a number of acquisitions all over Europe, but Fee says these aren’t properly integrated. “It’s not as unified a company as TNT.”

Deutsche Post has had a new CEO as of Feb. 8 — Frank Appel, who was head of logistics for the company. He replaces Klaus Zurnwinkel, who is suspected of tax evasion. John Allan is the new chief financial officer, who has occupied the post since Oct. 1, 2007. But Fee feels there’s only a certain amount they can do. “It’s hard to turn around a very big ship.”

Another issue is that Deutsche Bank owns 30.6% of the company’s shares, which it would like to sell. Fee notes that this is not a good time to sell; but when it happens, it would likely pull down the share price.

Nevertheless, if you want exposure to the sector, Fee thinks Deutsche Post isn’t a bad idea because the downside risk is “reasonably limited.”

UBS rates it “neutral,” with a 12-month price target for the 1.2 billion ordinary shares outstanding of 24.80 euros ($30.90 given the Mar. 19 exchange rate). They closed at 19.70 euros on Mar. 19, down from a high of 26.33 euros last May.

UBS is cautious because Deutsche Post’s attempt to have wage agreements with its union applied to new competitors was unsuccessful. The company is appealing, which is expected to take six months.

If the decision is upheld, Deutsche Post’s postal profitability will fall, although UBS suspects that the company has taken advantage of the uncertainty surrounding deregulation to sign a number of major customers to multi-year deals, which “could mitigate the negative effects of full liberalization.”

However, UBS also notes that Deutsche Post’s union has stated that it is prepared to strike unless it receives a “convincing offer on wage and working conditions” in the negotiations that are due to start this month.

Net income was 1.9 billion euros ($2.8 billion) in fiscal and calendar 2007, down from 2.3 billion euros in 2006. Revenue was 66.1 billion euros vs 63.4 billion euros. Long-term financial liabilities were 8.6 billion euros at Dec. 31, 2007.

Of the 3.2 million euros in income before interest and taxes in 2007, mail accounted for 2 million euros, financial services for 1.1 billion euros and logistics for one billion euros. DHL had a loss of $174 million euros while corporate services posted a loss of 660 million euros.

> Nippon Express Co. Ltd. Deregulation — which is driven by the previous Japanese government’s policy of breaking up enormous monopolies — is expected to begin later this year.

Nippon and Japan Post have announced that they will be integrating their parcel delivery services in a new company as of October. The two firms also plan to merge other operations down the road.

The merging of the parcel delivery operations could intensify price-cutting competition. There are two other major players in this space in Japan: Yamato Transport Co. and Sagawa Express Co. each have 30% market share. Nippon has about an 11% share while Japan Post’s share is 8%.

The amalgamation will also lead to cost-cutting in the new company, although Burbeck notes that this is very difficult to do in Japan — as it is in Europe — because of the difficulty in letting people go. It tends to be slow because companies simply wait for employees to retire and then don’t replace them. Fortunately, demographics are favourable as many of its employees are aged over 55 or 60, Burbeck adds.

UBS notes that details of how the parcel delivery operations will be streamlined has not yet been announced; and UBS is not factoring in any cost savings at this time.

UBS rates the company “neutral” with a 12-month target price of ¥600 ($6.05 at Mar. 19). The 1.1 million outstanding ordinary shares closed at ¥516 on Mar. 19. UBS says it sees no drivers of growth in fiscal 2008: “Together with an economic slowdown in the U.S., air cargo exports originating in Japan are expected to stagnate; and it is also difficult to foresee earnings growth for overseas subsidiaries.”

Nippon’s global logistics business is expanding with a new plant in Florida. This makes the stock a play on Japanese companies becoming more global, which Burbeck says is still happening.

Burbeck admits that the company’s growth won’t be high, but points out that Nippon has “relatively secure and safe earnings,” which should increase as a result of cost cutting. This makes it a “secure, relatively safe investment with low volatility” and not expensive for a Japanese company. He adds that it’s a well-managed firm.

Net income was ¥26.4 billion ($241 million) in the nine months ended Dec. 31, up from ¥24.7 billion a year earlier. Revenue was ¥1.42 trillion, up only slightly from ¥1.4 trillion. Long-term debt was ¥245.5 billion at Mar. 31, 2007, the latest figure available.

> TNT NV. Fee likes TNT, pointing out that it is a very well run company with a very strong buyback program, which has been responsible for about half of its earnings per share growth.

The company is preparing for postal deregulation with a cost-cutting program that is expected to produce savings of 300 million euros over each of the next seven years. This will offset lower postal revenue as competition brings prices down.

TNT’s potential has also been enhanced by its expansion into Asia, where it has made quite a few acquisitions, Fee says. But since it will take time to get the returns from its Asian expansion, investors aren’t yet factoring that into the stock price, which could make this a good time to get into the company as a long-term investment.

Fee notes that TNT used to trade at a premium as a result of takeover speculation, but that has disappeared because neither Memphis, Tenn.-based FedEx Corp. or Atlanta-based United Parcel Service Inc. — the two biggest courier companies in the world — want to be involved in postal service.

Although Joe D’Angelo, portfolio manager at Signature Advisors, a unit of CI Investments Inc. in Toronto, agrees that TNT’s postal business “muddies the waters” in terms of its potential as a takeover target, he thinks it is just a matter of time before FedEx, UPS or an Asian investor picks up the company. TNT has a strong logistics business moving heavy freight, which is dominant in Europe, that potential purchasers want. He adds that a takeover is quite feasible now that the Dutch government has sold off its golden share in the company.

But even without the takeover possibility, D’Angleo considers TNT “quite a substantial business that remains an attractive investment.” In his view, the company is “quite outstanding, with extremely good management and very efficient operations. It is always looking to optimize the cost base.” He adds that TNT has been the most aggressive in wanting to enter other European postal markets — such as Italy, Britain, Germany and Eastern Europe — and it has been building the necessary infrastructure.

UBS has a “buy” rating on TNT, with a 12-month target price of 36 euros a share ($56.47 at Mar. 19). The 376 million ordinary shares closed at 22.72 euros on Mar. 19. UBS thinks the restructuring charges in the fourth quarter of fiscal and calendar 2007 are encouraging because they suggest that some agreement has been reached with the union, although not an overall one. In UBS’s opinion it will be “a big positive” for the stock “if and when a deal is announced.”

Net income was 986 million euros ($1.4 billion) in 2007, up from 671 million euros in 2006. Revenue was 11 billion euros vs 10.1 billion. Long-term debt was 1.3 billion euros at Dec. 31. IE